My good friend, Dov Apfel, a medical malpractice attorney from Maryland who handles birth injury cases, wrote a very informative article in the December issue of Trial magazine (pasted below) about structured settlements in cerebral palsy medical malpractice cases.
Put most simply, a structured settlement means that rather than receiving all of the settlement money at one time, it is received in future installment payments. There are often huge financiallbenefits to structured settlements and I will post about them in a separate article. However, structures can be complex so it is important that the plaintiff’s attorney know exactly what they are doing so they don’t screw this up.
As experienced medical malpractice attorneys know all too well, sometimes arriving at an agreed-upon settlement amount with your adversary is just the beginning of a whole lot of work that is necessary to structure a settlement in a way that is most beneficial to your client. In fact, competent counsel know that you cannot begin to properly evaluate any settlement offer until you have already thought through exactly how any settlement amount will be received and allocated.
Accordingly, I believe that it is imperative in any substantial case that you perform your structured settlement analysis BEFORE you undertake any settlement negotiations. I can’t tell you the number of times my cases have benefitted from my conversations with structured settlement experts who pointed out subtle issues that made a big difference in the ultimate settlement of my case.
I am fond of saying “more information is always better than less information” and with structured settlements that mantra is really true: the more you know about structures and how to use them for your client, the better the result for your client.
Thanks for reading,
Here’s Dov’s article:
Settling the cerebral palsy case
You and one or more of your adversaries are interested in settling your birth-related cerebral palsy case. What factors should you take into account, and what obstacles are likely to arise, as you try to achieve a favorable settlement for the child and family?
Trial lawyers have been compared to poker players, who must make swift tactical decisions based on incomplete information.1 Yet there is a major difference between poker players and lawyers who represent brain-damaged children and their families.
Some successful poker players use statistical predictions to decide the odds of winning or losing with the cards that they have been dealt. Others may rely on their gut feelings to decide when to fold a hand, when to bluff, and when the potential return of playing a hand outweighs the risk of losing.
On the other hand, lawyers have an opportunity to consult with experts and review the facts before they decide to file a lawsuit and enter the trial arena. Later, they take depositions and engage in discovery to gather more information to help them educate their clients and make recommendations about the risks and benefits of settling or proceeding to trial.
Lawyers do not simply rely on their gut feelings or statistical predictions; they have to evaluate standard-of-care, causation, and damages issues before they can decide if the case has merit and what to tell clients about the probability of prevailing at trial.2 Lawyers also must fully explore a disabled child’s needs, by means of a life-care plan and economic projection, before they can advise the family whether to accept a settlement or proceed to trial.
In an ideal world, defense lawyers and insurers also would have ethical and legal duties to minimize the emotional burden that trials place on individual doctors and nurses, as well as an obligation to protect their insureds from the financial risks they face when a jury hears evidence that a brain-damaged child’s injuries could have been prevented.
This is not, of course, an ideal world. Sometimes doctors simply refuse to settle; other times, defense lawyers or their insurers refuse to negotiate in good faith and have personal agendas that have nothing to do with the merits of a particular case. Some trials may be inevitable from the outset, while others become inevitable when one or more of the parties fail to properly evaluate the merits of the case or the odds of winning.
There are cases, however, in which all or some of the parties ultimately conclude that settlement is the best option. Plaintiff counsel should consider several factors and anticipate potential obstacles when one or more defendants express a legitimate interest in settling a cerebral palsy (CP) case and the family has an opportunity to achieve a meaningful settlement.
Some defense lawyers still are willing to participate in direct negotiations, which, in certain cases, can be the best path to settlement. However, most insurance adjusters believe that the only way to settle a CP case is through mediation, and many cases are successfully resolved that way.
When mediation is the preferred approach, it is doomed to fail if the wrong mediator is selected. The mediator must be respected by all counsel and the insurer’s decision-makers, or mediation will be a waste of time. Cases with significant legal issues, particularly regarding the admissibility of expert opinions under Daubert and Frye standards, call for a mediator with sufficient knowledge and experience to assess those issues and offer the parties a realistic appraisal of their positions.3 Former judges may be uniquely qualified to mediate these types of cases.
Another consideration is the mediator’s ability or willingness to express his or her opinions and act independently. In cases where proof of liability and damages is strong, the case may be worthy of a settlement premium. Yet there are some mediators who evaluate every case within a predetermined range, no matter how egregious the facts. Generally, these are local mediators who are afraid or unwilling to raise the settlement range in CP cases and alienate insurance carriers and their defense counsel.
Such cases warrant a mediator with no ties to the local legal community and with experience evaluating cases with high seven- and eight-figure life-care plans. Therefore, in many circumstances, the parties should consider locating a mediator from another state or a different venue within a state. If the defendants are unwilling to agree to this option, they are probably not serious about paying fair settlement value for the case.
When a final settlement is reached, it should not be contingent on the child’s survival. This condition should be discussed at mediation, and it should be made clear that once the settlement is approved by the court, payment must be made to the family even if the child does not survive.
Many cases involve multiple defendants. Typically, the attending obstetrician and the hospital will be parties. These defendants and their lawyers and insurers might have differing views about the potential liability of each party or about the verdict range at trial.
One defendant may want to talk about settling, provided that each defendant is willing to contribute an equal share of the settlement amount. Another might refuse to make any contribution or be willing to pay only a certain amount or percentage. When there are multiple parties, a partial settlement may be the only option.
Many factors will influence the family and their counsel about whether to consider a partial settlement. Perhaps the most critical issue is how much the settling party is willing to pay. Is the policy limit being offered? Is the defendant judgment-proof? Will the nonsettling defendant be able to use the “empty-chair defense”? Is the client more likely to win at trial if the jury focuses on only one defendant who clearly contributed to the bad outcome?
The family’s lawyer must always consider how a partial settlement might affect a verdict. Will the non-settling party get a credit at trial for the amount of the settlement? Will the verdict be reduced by a percentage based on each tortfeasor’s pro rata share? Or will the jury simply decide the comparative fault of each defendant, so that the nonsettling defendant will pay the amount of the verdict based on the percentage of fault assigned by the jury? All these issues influence the decision about whether to consider a partial settlement.
The ultimate decision may be made by a client who concludes that the family cannot assume the risk of losing everything at trial and therefore is willing to accept a partial settlement as better than (potentially) nothing at all. Once the family understands the benefits of a structured settlement and how much money will be available for the child’s immediate and future needs, accepting a partial settlement might prove to be an easy decision.
Structured v. cash settlements
Few CP cases are amicably resolved without structuring a part of the settlement. One of the benefits of a structured settlement is that the periodic payments are tax-free. Section 104(a)(2) of the Internal Revenue Code states that gross income does not include the amount of damages received, whether as lump sums or as periodic payments, on account of personal physical injuries or physical sickness. In Revenue Ruling 79-220, the IRS emphasized that the exclusion applies when the beneficiary did not have the actual constructive receipt, or the economic benefit, of the lump sum that was invested to yield the monthly payment.
In order for the provision to be enforceable, money earmarked for the structure has to be paid directly to the life insurance company funding the annuity. All instruments must be carefully drafted to prevent the application of constructive- receipt rules that negate the tax benefits of a structured settlement.
Periodic payments guaranteed for the life of the child, with cost-of-living adjustments, are a critical element of any CP settlement designed to provide cash to pay for future care. The payment schedule can be tailored to fit the child’s needs, with payments made in either monthly or yearly installments, and it also can provide for the distribution of future lump sums at designated intervals. Payments can be made for life and they can be guaranteed for a specific duration, such as 10 or 20 years.
While it is important to provide for the long-term needs of the disabled child, the family’s lawyer cannot overlook the importance of providing a safe home environment and immediate care and therapy, which also contribute to the child’s quality of life and life expectancy. The settlement should provide adequate cash, both up front and over time, to pay for home improvements, special vans, anticipated surgery, and other critical services.
Perhaps the most critical factor that will determine the potential value of a structured settlement will be the child’s “rated age,” determined by the life insurance company funding the annuity. The higher the child’s rated age, the greater the benefit realized. A higher rated age means that the life insurer is assuming that the child has a reduced life expectancy and is willing to increase the amount of money that will be paid during the life of the child and decrease the cost of the annuity.
Thus, plaintiffs often face a quandary when seeking a structured settlement. It becomes necessary for their counsel to present the life insurance company with medical records and other information that will reduce the estimated number of years a child is expected to survive.
But a high rated age will be used by defendants at mediation to establish that the disabled child will not live long enough to require the money or services outlined in the life-care plan. Therefore, plaintiff counsel must ensure that any mediation discussions about rated ages and other communications with life insurance companies and structured-settlement representatives remain confidential, and that they remain protected by the applicable rules of evidence that exclude at trial all mediation discussions and matters involving rated ages, life expectancy, offers of compromise, and settlement efforts.
Sometimes the life insurer will conclude that the disabled child has a near-normal life expectancy. While that might not help to maximize the amount of the annuity, it may be useful for settlement value purposes. When the life insurance company has assessed the risk and concluded that reduced life expectancy is not a major concern, it is more difficult for defendants to convince the mediator that they should pay less because of a shortened life expectancy. All parties deal with the same life insurance companies, so it is common for rated ages to be consistent, regardless of which broker obtains the quote.
Counsel should know the actual cost of the structured-settlement proposal because it is a critical factor in determining the reasonableness of the settlement and in establishing the amount of the legal fee. Knowledge about the cost of the proposal does not constitute constructive receipt of the funds. A prudent attorney will hire his or her own annuity or structured-settlement specialist to independently analyze all structured-settlement proposals and to assist the family in choosing the best option to fund the child’s future needs.
Also, because an annuity calls for payments to be made over a long period of time, it is important to confirm that the life insurance company has a favorable rating. If a large sum of money is involved, it is always reasonable to consider spreading the risk and dividing the structure between two life insurance companies.
Attorney fees should be calculated based on the amount of up-front cash, plus the present value of the structured component (the periodic payments). It is wise to include a provision in the retainer stating that the fee will be calculated in this manner.
Sometimes parents believe they can invest or manage the settlement proceeds without using an annuity. Often they assume that the stock market will prove to be a better investment vehicle than an annuity with a fixed rate of return for the duration of the periodic payments.
Some money managers, eager to earn commissions on the portfolio, may advise parents that the stock market always goes up and can yield a higher rate of return than an annuity, depending on the time period used to assess the market’s performance.
However, the child needs to be protected from the potential mismanagement of a large sum of money, bad investments, and, in some cases, outright fraud. Some judges expect families to use annuities to settle cases involving minors with permanent injuries, and they will not approve a settlement that calls for a single cash payment to be invested in a diversified portfolio. In some jurisdictions, families have limited choices when it comes to investing a minor’s settlement funds, making a structured settlement the best, and possibly only, option for long-term investment.
The settlement of a CP case requires careful consideration of all the financial options that are available to provide present and future care. Plaintiff counsel should encourage the family to consult annuity specialists and financial planners to get a variety of views and suggestions.
Special-needs trusts. When settling a CP case, it is important to consider whether a special-needs trust is required to protect the child’s financial interests while maintaining his or her eligibility for government programs, including Medicaid, state medical waiver plans, and Supplemental Security Income. When a structured settlement is used to fund all or part of the settlement, the periodic payments are made to the trustee, who is obligated to administer the money in accordance with the terms of the special-needs trust agreement.
Nuances and peculiarities of state law have to be taken into consideration in preparing the trust instruments. It is prudent to ask an attorney experienced in preparing special-needs trusts to meet with the clients and assume responsibility for helping them develop a plan to protect the child’s assets and maintain eligibility for all government benefits.4
Qualified settlement trusts. When the family decides to settle with only one of several defendants, it may be possible to preserve the tax benefits and avoid constructive receipt by creating a qualified settlement trust (QST) under §468B of the Internal Revenue Code.5 A QST may be an option in CP cases involving multiple defendants to fund an annuity financed with the proceeds of a structured settlement reached with one of the defendants.
It is prudent to consult with an attorney who has experience creating such a trust and is willing to opine that using a QST will avoid constructive receipt and preserve the tax-free treatment of the periodic payments and the settlement. It also is important to consult with the annuity broker to find out if the life insurance companies with the highest rated ages are willing to offer an annuity for a structured settlement that is funded with proceeds placed in a QST.
The settlement of CP cases often involves many legal issues concerning the satisfaction of third-party liens and subrogation claims. Plaintiff counsel must be familiar with federal and state statutes—as well as the growing case law interpreting the rights of Medicaid, Employee Retirement Income Security Act (ERISA) plans, private insurers, and others to seek reimbursement for what they paid to provide medical services for the child.6 The existence of any liens, as well as the uncertainty regarding the amount of such liens, can play a critical role in the settlement of a CP case.
If it becomes necessary to set aside a substantial sum of money to satisfy potential liens, the family might not have the necessary cash available to pay for immediate and future expenses. It is often difficult to predict how long it will take to negotiate a reduced payment of a lien or secure a judicial resolution.
It is always helpful if outstanding liens can be amicably resolved so that the court can approve the reduced payments at the same time it approves the settlement. When this is not possible, the petition or motion for approval of the settlement should reflect that the plaintiff is aware of potential liens but does not agree that the amounts claimed accurately reflect what the lien holders are entitled to receive.
One option is for the family to place sufficient cash in a QST for the purpose of resolving any potential claims. The cash remaining after the payment of liens can then be allocated equitably, subject to the court’s approval, between the parents and their minor child.
If a satisfactory reduction of a lien is not negotiated, counsel should ask the court to conduct a hearing, as the U.S. Supreme Court required in Arkansas Department of Health & Human Services v. Ahlborn.7 In Ahlborn, the Court held that any reimbursement for Medicaid claims from tort settlements is limited to that portion of the settlement attributable to past medical expenses. This decision has significant ramifications in the settlement of any case in which a CP child’s medical expenses were paid for by a government-funded health care plan.
Trial courts have the authority to make an equitable apportionment and determine the amount of the lien that should be reimbursed. In a helpful decision, the New York County Supreme Court in Lugo v. Beth Israel Medical Center held that:
- The lien claimed by New York City’s Department of Social Services was limited to the amount of the settlement allocated to past medical expenses.
- A trial judge is permitted to conduct a hearing to decide the amount of the lien that should be reimbursed by comparing the settlement amount to the actual value of the case.
- As long as the child’s counsel holds in escrow a sufficient amount to cover the lien pending the court’s determination, the balance of the settlement proceeds may be disbursed.8
Every state has a procedure for seeking court approval of a tort settlement involving a minor. In some jurisdictions, the trial judge can approve the settlement; in others, a special probate judge is assigned.
Judges have different approaches and preferences, and it is critical to determine the judge’s expectations. Some approval hearings might last 10 minutes; others might last an hour or longer. Some judges are satisfied if a comprehensive motion is filed with all necessary disclosures. Regardless, the judge needs to approve the settlement, the allocation of the proceeds, the attorney fees, the reimbursement of litigation costs, and the satisfaction of liens.
One benefit of the court approval process is that most judges will question the parents under oath at the hearing to confirm that they understand the terms, risks, and benefits of the settlement. Plaintiff counsel should advise his or her clients that the court will ask them if they are satisfied with the settlement, the quality of their legal representation, and the amount of legal fees and costs. It is better to find out before the hearing if the clients have any problems or concerns that could prevent the court from approving the settlement.
Allocation of proceeds
While the presumption is that the bulk of the settlement proceeds will be paid to the child for his or her present and future care, parents often expect that some or all of their out-of-pocket expenses will be reimbursed as well. One or more family members will have devoted an enormous amount of time to taking care of the child and, often, they will have missed or quit work for this reason. Their expectation of reimbursement often arises whether or not they are parties to the lawsuit, and whether or not the law of the jurisdiction recognizes such a claim.
While the focus of a settlement is properly on the child’s needs, the parents’ needs should never be overlooked. Parents often incur crushing debt to pay for their child’s care and are exposed to enormous emotional stress. The family’s counsel should emphasize to the court the importance of keeping the parents emotionally and financially secure—even if they are not parties to the suit—so they can continue to support and care for their child.
Most judges recognize the special role of the parents of a child who has CP. As long as the allocation is fair and reasonable in light of the entire settlement and the parents do not appear greedy, judges usually are willing to approve a payment to them as they would to any other lien holder.
Certainly, if the parents incurred extraordinary expenses to take of their child, those expenses should be reimbursed. Similarly, the value of the parents’ attendant care that would otherwise have been provided by skilled caregivers should not be minimized. It should be carefully taken into consideration in the allocation of the settlement proceeds.
Insurers routinely insist that a settlement remain confidential. Not only are the clients expected not to disclose the terms of the settlement, but the family’s attorneys also are expected to confirm their agreement to abide by the terms of the confidentiality provision. Practically speaking, clients who are satisfied with a settlement are likely to agree to a confidentiality provision.
Plaintiff counsel should be aware that the IRS may try to claim that any consideration paid for the confidentiality provision is taxable, because it is separate from the consideration paid for settlement of the personal injury claims, which is normally excluded from income under §104(a)(2) of the tax code.9 One option that may avoid any potential dispute with the IRS about the consideration paid for the confidentiality clause is to have the settlement agreement expressly state that one dollar was paid as the consideration for the confidentiality clause. Other options should be discussed with counsel responsible for preparing the trust documents.
Before plaintiff counsel can properly advise the family about a potential settlement with one or more defendants, he or she must know how the medicine and the clinical facts of the case will affect the liability and causation issues at trial. Of equal importance, counsel must clearly understand the child’s present and future needs, and whether those needs can be met by purchasing an annuity to fund a properly designed special-needs trust and structured settlement with one or more defendants.
Each case is unique, and every family deserves a careful and informed evaluation of the liability and damages issues in their particular circumstances.
Dov Apfel is a shareholder in the Greenbelt, Maryland, firm of Joseph, Greenwald & Laake. He can be reached at email@example.com. © 2007, Dov Apfel.
- Steven Lubet, Lawyers’ Poker (Oxford U. Press 2006).
- See generally Dov Apfel, Using a Differential Diagnosis to Prove that Intrapartum Asphyxia Is a Significant Cause of Cerebral Palsy, 30 Am. J. Tr. Advoc. 89 (2006).
- See Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993); Frye v. United States, 293 F. 1013 (D.C. Cir. 1923).
- See Jason D. Lazarus, Protect Public Benefits for Your Special-Needs Client, TRIAL 44 (June 2005), www.justice.org/publications/trial/0506/lazarus.aspx.
- See Don McNay & William Garmer, Is a Qualified Settlement Fund Right for Your Client?, TRIAL 62 (Jan. 2002), www.justice.org/publications/trial/0201/mcnay.aspx.
- For more on this topic, see Peter H. Wayne IV & Mark R. Taylor, Beware the ERISA Health Plan Lien, in this issue at p. 48.
- 547 U.S. 268 (2006).